By: Nidhi Nath Srinivas
International cotton prices hit a 10-year high in April. Demand for yarn to weave cloth is far higher than global supply of cotton to spin it. This shortage is expected to remain.
Amongst all crops, that makes cotton the best investment opportunity right now for punters, traders and farmers. Make that especially farmers. This is the perfect year to squeeze maximum cotton out of every inch of land.
Unfortunately, unlike traders and punters, our farmers are not free to maximize profits. Their freedom has been usurped by a government that infantilizes them in the name of protection but with little understanding of business.
Top producers Andhra Pradesh and Gujarat have fixed a new lower price for genetically modified cotton seeds sold by private companies to save farmers some money. That sounds logical in these expensive times. Until, one starts wondering whatever happened to the market. Is it dead?
Thats what farmers and seed companies are wondering too. Had sellers (seed companies) and buyers (farmers) been allowed to work in their own best interests, seed prices would have risen as long farmers believed the extra investment multiplied their profits. Once seeds stopped escalating profits, farmers would have turned away. At that point, even one extra rupee makes no sense.
Farmers are never attracted by the absolute price of seed but what it adds to bottom line. A few rupees here and there is no big deal when it delivers one-and-a-half times more from the same acre.
Thats why cotton seed could dare to be pricier than other crops. You cant calculate exactly how much a BlackBerry adds to your productivity. Buy a smart seed, and you could up to the last paisa.
Sellers know this only too well. Their pricing power comes directly from tangible buyer benefit. It is a natural ceiling on what even giant corporations can charge. To maximize this power, companies funnel millions of dollars, over decades, into technology that will raise farm productivity. Its the only way to survive in a sector where competition is compounded by weather and agronomic uncertainties.
When market is free, sellers compete to pack more and more sophisticated technology in every seed. The world in a grain of sand, almost. But customer satisfaction is a swiftly moving target. When technology stagnates, they vote with their feet.
Of course, there will always be some who cant afford the best. Government already sells average-quality subsidized seeds. It could even buy smart seeds from the market and supply, as it does grain in ration shops. Thats fair. Punishing corporate cartels is fair.
Whats not fair is destroying the very market for science in agriculture. When companies are not allowed to sell at a market-dictated price, they will be forced to bolster margins or plug losses through other means. With no guarantee of returns, those that develop technology will cut investment.
Indian companies launching seeds with indigenous technology are particularly bitter. Their story may be over in this first season, leaving India even more dependent on foreign players.
Those that buy technology from foreign seed science companies say they will either re-negotiate contracts at a lower price or wont update technology. Less seed will be produced as farm labour is expensive. Less seed will be sold when marketing margins are squeezed. The repercussions jaded crops and desperate farmers will soon be visible. There are no winners.
To make it more alarming, neighbours Gujarat and Maharashtra have already taken copy-cat action. As a large producer of rice, corn and oilseeds, Andhra could easily impose similar price ceilings in several crops. If other states follow, where will we be?
The nub of the matter is that property rights are being re-defined and re-negotiated in agriculture. Once, a plant was yours when you picked it. Today its yours when you embed traits or brand it. This shift is necessary if companies are to invest in crop science. Lobbies that pressure government to interfere need to accept this. Any change looks terrible at first.
Seed companies are not being 'greedy' when they demand a premium for intellectual property. It is their due if we are to continue profiting from innovation. The free market for crop biotechnology, and not politics, created new wealth for Indian farmers. This year can easily take the cotton story forward. If only government stays away. Capitalism is efficient. Prejudice is not.
Originally published in The Economic Times: 20 May 2010